Agrium (AGU) is a Canadian-based company that produces fertilizer and runs retail stores selling supplies to farmers. Agrium is the most diversified agricultural supplier, making it a superior investment choice. Changes in specific commodity prices that would have an outsized affect on more concentrated fertilizer producers are buffeted by Agrium's diversification and retail operations. The retail operations are especially attractive, as they face low competition and earn a margin regardless of underlying commodity prices.
The trend of increasing farm size due to corporate farming and scale increases is a significant benefit to their operations. Larger scale operations are more likely to purchase additional productivity enhancing inputs. They are also more likely to have the financial wherewithal to invest in crop nutrition and crop protection products.
According to Agrium's Q1 Conference call, they added 59 retail locations in 2012. These smaller scale acquisitions are accretive, because Agrium can integrate them into its supply chain and manage them more effectively than the former small operators.
Agrium also bought Viterra's retail operations in the breakup of that company. Although this acquisition has not yet closed, it recently received approval from the Australian competition authorities, and Canadian approval should be forthcoming. Because the after tax cash flow of the Viterra assets from March 2012 until closing will be applied against the purchase price, the delays are not negative to Agrium. They are essentially able to capture the cash flow from that asset without having put up the capital to purchase it until the deal closes.
Q1 2013 had record EBITDA of $25 million (the business is highly seasonal) showing the growth possibilities from Agrium's synergistic acquisitions. Agrium has guided to $1.3 billion of retail EBITDA over the next few years. Even at a 5X forward EV/EBITDA multiple, which is highly reasonable for a growing retail business with low capital spending needs, this business would be valued at $7.8 billion.
Agrium recorded EBITDA of $1.9 billion in its wholesale division in 2012. Capitalizing that at 6x EBITDA gives it a value of $11.4 billion. That is a reasonable valuation metric, due the businesses diversity across all major crop nutrients and numerous geographies. There is also potential upside to the fertilizer production business through the expansion of potash volumes through its brownfield expansion coming on-line in 2014 and expected expansions to North American nitrogen production. North American nitrogen production is cost advantaged due to low cost North American, and even lower cost Albertan natural gas.
Another potential upside comes from its Egyptian joint venture, which was shut down during the unrest in that country. The restart of that project is expected, which could be a growth driver for Agrium.
Agrium also had Glencore sell its interest in a Medicine Hat nitrogen fertilizer facility. The gross proceeds of that sale were approximately $1 billion, with $939 million of that in cash. That will reduce the net payment by Agrium to Glencore for its share of Viterra's assets, making that transaction even more accretive to Agrium, another source of fertilizer earnings.
The valuations for the two divisions sum to $19.2 billion. With total current assets approximately equal to total liabilities, that would suggest a long term share price target of $127, substantially in excess of its current price of $95.86.
The company has also initiated share repurchases, which compounds value, as the shares are an excellent investment, so the company purchasing shares multiplies your leverage to a valuation re-rate. Agrium has also recently increased its dividend to $0.50 per quarter, for a 2.1% yield, increasing total shareholder return.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.